MONETARY POLICY; MONEY AND BANKING; FED RESERVE BANK
Suppose that you deposit $2,000 in your bank and the required reserve ratio is 10 percent. The maximum loan your bank can made as a direct result of your deposit is
$1,800.
Suppose you withdraw $500 from your checking account and bury it in a jar in your backyard. If the required reserve ratio is 10 percent, checking account deposits in the banking system as a whole would drop up by a maximum of
$5,000.
Monetary policy refers to the actions the
Federal Reserve takes to manage the money supply and interest rates to pursue its economic objectives.
If Rob deposits $300 in currency into his savings account at Bank of America,
M1 decreases.
If the Federal Reserve decided to include virtual money like Bitcoins in its measure of the money supply, what would be the effect on M1 or M2?
M1 would rise.
Monetarism is a school of thought put forth by ________, who argued that the economy would ordinarily be at potential GDP.
Milton Friedman
Among potential stores of value, money
has the advantage of being the most liquid asset.
A decrease in the discount rate will
increase the money supply.
Suppose that households became mistrustful of the banking system and decide to decrease their checking account balances and increase their holdings of currency. Using the money demand and money supply model and assuming everything else is held constant, the equilibrium interest rate should
increase.
Using the money demand and money supply model, an increase in money demand would cause the equilibrium interest rate to
increase.
Using the money demand and money supply model, an open market sale of Treasury securities by the Federal Reserve would cause the equilibrium interest rate to
increase.
An open market purchase by the Fed
increases investment and increases output.
If the money multiplier is 3.0, a $1,000 increase in the monetary base
increases quantity of money by $3,000.
An increase in the interest rate
increases the opportunity cost of holding money.
An open market purchase by the Fed
increases the total amount of reserves in the banking system.
Which of the following would be most likely to induce the Federal Reserve to conduct expansionary monetary policy? A significant decrease in
investment spending.
Banks can make additional loans when required reserves are
less than total reserves.
Fiat money has
little to no intrinsic value and is authorized by the central bank or governmental body.
Your roommate is having trouble grasping how monetary policy works. Which of the following explanations could you use to correctly describe the mechanism in which the Fed can affect the economy through monetary policy? Increasing the money supply
lowers the interest rate, and firms increase investment spending.
Banks create money by
making loans
Which of the following assets is most liquid?
money
The nominal interest rate is determined in the
money market.
If the Fed buys Treasury bills, this will shift the
money supply curve to the right.
The appreciation of the dollar will make U.S. goods ________ to foreigners and make imports ________ for U.S. residents.
more expensive; cheaper
If the amount you owe on your house is greater than the price of the house, you have
negative equity in your house.
If credit card balances rise in the economy, then M1 will ________ and M2 will ________.
not change; not change
With the federal funds rate near zero and the economy still struggling, the Fed began buying 10-year Treasury notes and certain mortgage-backed securities to keep interest rates low. This policy is known as
quantitative easing
If the central bank can act as a lender of last resort during a banking panic, banks can
satisfy customer withdrawal needs and eventually restore the public's faith in the banking system.
What would be a way for the Federal Reserve to slow down the economy when it is growing too quickly or is inflationary?
sell more government bonds
The Fed can attempt to increase the federal funds rate by
selling Treasury bills, which decreases bank reserves.
The Board of Governors of the Federal Reserve System has
seven members serving for 14−year terms.
A decrease in real GDP can
shift money demand to the left and decrease the interest rate.
A car dealer sells you a car today in exchange for money in the future. This illustrates which function of money?
standard of deferred payment
Which of the following functions of money would be violated if inflation were high?
store of value
If the Fed raises its target for the federal fund rate, this indicates that
the Fed is pursuing a contractionary monetary policy.
Liquidity is defined as
the ease with which a given asset can be converted to a medium of exchange.
When the Fed increases the money supply,
the interest rate falls and this stimulates investment spending
The Federal Open Market Committee is
the main policy making body of the Fed.
Monetarists think that the Fed should use _________ as a target when conducting monetary policy.
the money supply
When the Fed uses contractionary policy,
the price level rises less than it would if the Fed did not pursue policy.
The main belief of the monetarist model is that
the quantity of money should be increased at a constant rate.
The major shortcoming of a barter economy is
the requirement of a double coincidence of wants.
Which of the following describes what the Fed would do to pursue an expansionary monetary policy?
use open market operations to buy Treasury bills
If the Fed's policy is contractionary, it will
use open market operations to sell Treasury bills.
Commodity money is a good
used as money that also has value independent of its use as money.
Bank reserves include
vault cash and deposits with the Federal Reserve.
If households and firms decide to hold less of their money in checking account deposits and more in currency, then initially the money supply
will not change.
If the Fed fears inflation, then the Fed
will sell government securities in the open market.
Imagine that Kristy deposits $10,000 of currency into her checking account deposit at Bank A and that the required reserve ratio is 20%. Refer to the scenario above. As a result of Kristy's deposit, Bank A's required reserves increase by
$2,000.
The required reserve ratio is 20 percent and banks have no excess reserves. Katie deposits $300 in her bank. What are the bank's excess reserves immediately after Katie makes her deposit?
$240
Refer to the table above. Suppose a transaction changes a bank's balance sheet as indicated in the T−account, and the required reserve ratio is 10 percent. As a result of the transaction, the bank has excess reserves of
$3,600.
Suppose a bank has $1,000 in deposits and $100 in reserves. If the desired reserve ratio is 5 percent, how much can this bank increase its loans?
$50
Imagine that Kristy deposits $10,000 of currency into her checking account deposit at Bank A and that the required reserve ratio is 20%. Refer to the scenario above. As a result of Kristy's deposit, Bank A's excess reserves increase by
$8,000.
If a person takes $100 from his/her piggy bank at home and puts it in his/her savings account, then M1 will ________ and M2 will ________.
decrease; not change
When the Federal Reserve increases interest rates, investment spending ________ and GDP ________.
decreases; decreases
When housing prices ________ as they did beginning in 2006 following the housing market bubble, most banks and other lenders tightened the requirement for borrowers, making it ________ for potential home buyers to obtain mortgages.
fell; harder
Expansionary monetary policy to prevent real GDP from falling below potential real GDP would cause the inflation rate to be relatively ________ and real GDP to be relatively ________.
higher; higher
A decrease in interest rates can _________ the demand for stocks as stocks become relatively _______ attractive investments as compared to bonds.
increase; more
If a person withdraws $500 from his/her savings account and puts it in his/her checking account, then M1 will ________ and M2 will ________.
increase; not change
When housing prices fell as they did beginning in 2006 following the housing market bubble, most banks and other lenders ________ the requirement for borrowers, making it ________ for potential home buyers to obtain mortgages.
tightened; harder
If the required reserve ratio is 5 percent, then the simple deposit multiplier is
20.
If the reserve requirement ratio (RR) is 0.20, the simple deposit multiplier is
5.
A good can serve as money only if
citizens accept the good as a means of payment for transactions and debts.
To increase the money supply, the Federal Reserve could
conduct an open market purchase of Treasury securities.
To decrease the money supply, the Federal Reserve could
conduct an open market sale of Treasury securities.
The M1 measure of the money supply equals
currency plus checking account balances plus traveler's checks.
An open market sale by the Fed
decreases the money supply and decreases output.
The supporters of a monetary growth rule believe that active monetary policy
destabilizes the economy, increasing the number of recessions and their severity.
The rate of interest charged to commercial banks by the Fed for loans is called the ________ rate.
discount
When housing prices ________, as they did beginning in 2006 following the housing market bubble, consumption spending on furniture, appliances, and home improvements decline as many households find it ________ to borrow against the value of their homes.
fall; harder
Paper currency is a
fiat money.
Open market operations refer to the purchase or sale of ________ to control the money supply.
U.S. Treasury securities by the Federal Reserve
Economies where goods and services are traded directly for other goods and services are called ________ economies.
barter
Fiat money is generally issued by
central banks.
If the Fed raises the federal funds rate, eventually the
AD curve shifts leftward and real GDP decreases.
A U.S. company that wishes to sell more to other countries would favor
a depreciation of the dollar.
The situation in which short-term interest rates are pushed to zero, leaving the central bank unable to lower them further is known as
a liquidity trap.
The statement, "My iPhone is worth $700" represents money's function as
a unit of account.
The argument advanced by Milton Friedman for adopting a monetary growth rule is that
active monetary policy potentially destabilizes the economy.
Contractionary monetary policy causes
aggregate demand to fall and the price level to fall.
Increased investment spending in the economy would be a possible result of
an open market purchase of bonds by the Fed.
Decreased investment spending in the economy would be a possible result of
an open market sale of bonds by the Fed.
A bank will consider a car loan to a customer __________ and a customer's checking account to be ____________.
an asset; a liability
The federal funds rate is the interest rate that
banks charge each other for borrowed money.